Rising export prices improve terms of trade

Producer prices in manufacturing in June were by 2.3% higher than a year ago, largely driven by the rise in the prices of food and wood products. Overall, this matches the producer price expectations (See Fig. 1). Over the coming months as well, producer price rises will remain moderate: there is no substantial upward pressure either from the raw materials market or the labour market. The price of oil, for example, has been stable for the past week, whereas a record harvest is expected for cereals this year, which, according to estimates by the UN Food and Agriculture Organization, will substantially exceed consumption.

The producer price rises for export goods in manufacturing have been more rapid than for production sold domestically (by 3.0% and 1.3% respectively). Thus the producer price rise does not create a pressure on consumer price rise: even though the short deflation period is over, the average inflation of this year, given the sustained economic growth, will be unusually low.

As the export unit value grew faster than that of import, terms of trade improved in Q1 2013. 2012 was not favourable to Latvia in terms of trade conditions, whereas this year the long-term gains from trade conditions could become entrenched (see Fig. 2), exerting a positive influence on Latvia’s external trade balance.

Fig. 1. Producer prices and business price expectations in manufacturing